Violation of Seal Provision Does Not Require Dismissal of FCA Suit

U.S. Supreme Court Upholds Fraud Judgment Against State Farm

The False Claims Act (FCA) allows individuals to file suit on behalf of the United States if they can prove that a person or entity is involved in defrauding the United States.

Cori and Kerri Rigsby were insurance adjusters who handled Hurricane Katrina claims for a contractor for State Farm. The Rigsbys became witnesses on behalf of tort lawyer Dickie Scruggs, in multiple suits against State Farm and other insurers, that claimed improper claims handling as a result of the hurricane. Because Scruggs was convicted of an attempt to bribe a judge and imprisoned the Rigsbys’ relationship with Scruggs ended and they filed an FCA suit against State Farm.

In State Farm Fire and Cas. Co. v. U.S ex rel. Rigsby, Supreme Court of the United States, — S.Ct. —-, 2016 WL 7078622 (12/6/16) the FCA claim of the Rigsbys’ made its way to the U.S. Supreme Court on a single legal issue: what is the proper remedy when there is a violation of the False Claims Act (FCA) requirement that certain complaints must be sealed for a limited time period. There are two questions presented before the Supreme Court:

First, do any and all violations of the seal requirement mandate dismissal of a private party’s complaint with prejudice?

Second, if dismissal is not mandatory, did the District Court here abuse its discretion by declining to dismiss respondents’ complaint?

FACTS

The FCA imposes civil liability on an individual who, inter alia, “knowingly presents … a false or fraudulent claim for payment or approval” to the Federal Government.  Almost unique to the FCA are its qui tam enforcement provisions, which allow a private party known as a “relator” to bring an FCA action on behalf of the Government.

State Farm is an insurance company. In the years before Hurricane Katrina, petitioner issued two types of homeowner-insurance policies that are relevant in this case: (1) Federal Government-backed flood insurance policies and (2) petitioner’s own general homeowner insurance policies. The practical effect for homeowners who were affected by Hurricane Katrina and who purchased both policies was that petitioner would be responsible for paying for wind damage, while the Government would pay for flood damage. As the Court of Appeals noted, this arrangement created a potential conflict of interest: Petitioner had an incentive to classify hurricane damage as flood-related to limit its economic exposure.

Cori and Kerri Rigsby are former claims adjusters for one of petitioner’s contractors, E.A. Renfroe & Co. Together with other adjusters, they were responsible for visiting the damaged homes of petitioner’s customers to determine the extent to which a homeowner was entitled to an insurance payout. According to respondents, petitioner instructed them and other adjusters to misclassify wind damage as flood damage in order to shift petitioner’s insurance liability to the Government.

In the months before the seal was lifted in part, respondents’ then-attorney, one Dickie Scruggs, e-mailed a sealed evidentiary filing that disclosed the complaint’s existence to journalists at ABC, the Associated Press, and the New York Times. All three outlets issued stories discussing the fraud allegations, but none revealed the existence of the FCA complaint. Respondents themselves met with Mississippi Congressman Gene Taylor, who later spoke out in public against petitioner’s purported fraud, although he did not mention the existence of the FCA suit at that time. After the seal was lifted in part, Scruggs disclosed the existence of the suit to various others, including a public relations firm and CBS News.

The Supreme Court, by Justice Kennedy, concluded that there is no textual indication that Congress conditioned the authority to file a private right of action on compliance with the seal requirement or that the relator’s ability to bring suit depends on adherence to the seal requirement.

At the time of the motion to dismiss in 2011, respondents were represented neither by Scruggs nor by any of the attorneys who had worked with him. In March 2008, Scruggs withdrew from respondents’ case after he was indicted for attempting to bribe a state-court judge. Two months later, the District Court removed the remaining Scruggs-affiliated attorneys from the case, based on their alleged involvement in improper payments made from Scruggs to the Rigsbys. The District Court did not punish the Rigsbys for the payments because they were not made aware of the ethical implications and, as laypersons, are not bound by the rules of professional conduct that apply to attorneys.

In deciding petitioner’s motion the District Court considered only the seal violations that occurred before the seal was lifted in part, reasoning the partial lifting in effect had mooted the seal. The case went to trial, resulting in a victory for respondents on what the Court of Appeals referred to as a “bellwether” claim regarding a single damaged home.

ANALYSIS

State Farm’s primary contention was that a violation of the seal provision necessarily requires a relator’s complaint to be dismissed. The FCA does not enact so harsh a rule.

The FCA’s structure is itself an indication that violating the seal requirement does not mandate dismissal. The Supreme Court adheres to the general principle that Congress’ use of “explicit language” in one provision “cautions against inferring” the same limitation in another provision. It is proper to infer that, had Congress intended to require dismissal for a violation of the seal requirement, it would have said so.

Again, the FCA’s structure shows that Congress knew how to draft the kind of statutory language that petitioner seeks to read into the statute. The applicable version of the public disclosure bar, for example, requires a district court to dismiss an action when the underlying information has already been made available to the public, unless the plaintiff is the Attorney General or an original source.

Of note in this case, petitioner did not request any sanction other than dismissal. Had petitioner sought some lesser sanctions, the District Court might have taken a different course. Yet petitioner failed to do so. On this record, the question whether a lesser sanction is warranted is not preserved.

The judgment of the Court of Appeals for the Fifth Circuit is

ZALMA OPINION

The Rigsbys were lucky that their violation of insurance adjuster ethics was excused by the Supreme Court although they took payments from Scruggs and his associates to testify against State Farm. Since a jury found State Farm had committed a fraud against the United States Flood Insurance Program it attempted to avoid the effect of the finding by seeking to dismiss the case because of the actions of Scruggs. The technical defense failed.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

Share

About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
This entry was posted in Zalma on Insurance. Bookmark the permalink.